California AG seeks foreclosure suspension

Fannie overseer to be grilled Tuesday about resistance to mortgage cuts

By

RonaldD. Orol

WASHINGTON (MarketWatch) — California Attorney-General Kamala Harris on Monday said she asked a major U.S. housing regulator to halt foreclosure sales in the state for homes owned by Fannie Mae and Freddie Mac until the agency completes an analysis of whether it would allow cuts in the amount struggling borrowers owe.

So far, the two big mortgage firms, which were taken over by the U.S. government during the height of the financial crisis, are not participating in an existing government program to reduce the amount owed by troubled homeowners, known as principal reduction.

FHFA acting chief Edward DeMarco is expected to be grilled Tuesday by Democratic senators at a Senate Banking Committee hearing he is scheduled to appear before.

Democrats have been putting pressure on DeMarco to allow for principal reduction, arguing that such a move would be in the best interest of struggling homeowners and taxpayers overall because it would help the economy improve.

Harris, in the letter sent to DeMarco late Friday, noted that big banks have agreed to cut $12 billion worth of principal for certain California borrowers as part of a broad bank settlement. However, Fannie and Freddie, which own or guarantee 60% of California mortgages, has declined to authorize principal reduction programs for mortgages it owns.

Harris said in the letter that since 2008, more than half a million Californians have lost their homes to foreclosure and that another half million homes are either in foreclosure or at “imminent” risk of a foreclosure filing in 2012.

Treasury Secretary Timothy Geithner said Feb. 2 that FHFA is still open to examining the economic case for reducing principal owed by borrowers who have mortgages owned by Fannie and Freddie. The Treasury in January expanded a program to that seeks to help borrowers on the verge of foreclosure by tripling incentive payments to investors who cut the amount owed by borrowers.

The program expansion also offered Fannie and Freddie incentives to reduce the principal of mortgages owned by the two mortgage giants. In response, FHFA said it would study the new incentives.

Walter Schmidt, a senior vice president at FTN Financial Capital Markets in Chicago, said a foreclosure moratorium would delay the economic recovery.

“Do you want to get past this phase of the housing market or not? Do you want to keep people into homes they can’t afford? You can’t just keep extending this problem,” Schmidt said.

Foreclosures to rentals

The effort in California comes as the FHFA took a step forward with a program that it hopes will transform foreclosed properties into rehabilitated rental units and kick-start the economy.

The FHFA announced a pilot program to sell 2,490 foreclosed properties owned by Fannie Mae in Atlanta, Chicago, Las Vegas, Los Angeles, Phoenix and parts of Florida, to large investors.

The plan would be to have institutional investors and other qualified buyers convert these properties into rentals, a market that has strengthened recently.

DeMarco said he believed the program will help stabilize neighborhoods and home values, shifting to more private management of properties and reduce the supply of foreclosed homes in the marketplace.

However, an FHFA spokeswoman said that no debt financing is being provided by the government as part of this initial pilot program. She added that there has been significant interest in the program, but the agency does not disclose the names of investors that have been pre-approved in the program.

FTN’s Schmidt said that if FHFA is not offering government financing now they may do it later. “The bids will be a lot lower without government financing,” he said. “Is the administration going to let private enterprise make a profit on this?”

Regulatory observers had expected the FHFA to develop a program that would use government financing or guarantees to attract investors to buy up big regional or national pools of foreclosed properties currently owned by both Fannie Mae and Freddie Mac.

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